TME reported an in-line 2Q24. Both music subs driven by healthy paying net adds and ARPPU growth and music non-subs contributed by advertising and offline events fueled 28% YoY music revenue. Historical record high quarterly diluted EPADS reflects sustained GPM expansion and efficient cost management. Despite unchanged targets of mid-term avg. annual 150m paying subs and RMB15 monthly ARPPU, we currently estimate that Co. will only achieve these in 2028 due to their proactive refined music subs operational strategy towards ARPPU prioritised for sustainable high quality growth amid stable music competition. We cut our 2024-26 total revenue forecasts due to decreased music paying users and social revenue estimates. Various music non-subs monetisations will support uplifted non-subs momentum. Reiterate BUY but cut our TP to US$13.0/ HK$51.0.

Key Factors for Rating

Refined music subs operations for high quality growth. We deem Co. will dedicate to maximize high quality music monetisations by prioritising music subs as primary growth engine and diversifying music non-subs commercialisations based on content, privileges, resources, product offerings, scenarios, operations (pricing, promotions, marketings) and technology. For music subs, we expect ARPPU will be an operational strategic focus down the road with SVIPs being the main contributor. Co. maintains their mid-term avg. annual 150mn paying subs and RMB15 monthly ARPPU targets but we forecast they will only achieve these in 2028 under refined strategy. Advertising, merchandise sales, digital album, LFA and various monetisation formats will support sustainable music non-subs growth. Thus, we lower our 2024-26 music subs revenue forecasts by 1%-8% due to paying subs cut but unchanged ARPPU estimates. While we nudge up our music non-subs revenue forecasts by 1-4% in 2024-26 driven by diversified monetisations on healthy music ecosystem, we also cut our social revenue forecasts by 9-14% in 2024-26 to reflect our conservative view on Co.'s strategy under macro and competition. However, our 2024-26 adj. NP forecasts are relatively less impacted despite revenue cut due to increased GPM assumptions on revenue mix shift and improved opex management.

2Q24: In-line results. Total revenue was RMB7.2bn (down -2% YoY), in line with consensus. Music revenue delivered 28% YoY to RMB5.4bn, with music subs and music non-subs logging 29% YoY and 24% YoY respectively. 3.5m quarterly music paying net adds to 117.0m was within streets' expectation, leading to improved 20.5% music paying penetration. Simultaneously, flattish QoQ monthly ARPU of RMB10.7 also met consensus. Solid music ad momentum and monetisations of offline performances drove music non-subs growth. Social revenue dropped by -43% YoY to RMB1.7bn. In-line GPM continued to expand by 7.8ppts YoY/1.1ppts QoQ to 42.0% on sustained healthy drivers. Leveraging efficient opex, Co. has achieved historical record high diluted EPADS of RMB1.07 despite RMB111m accrual withholding income tax (recurring item).

Key Risks for Rating

Downside risks: 1) key label collaboration; 2) fierce competition; 3) regulation;

4) weak macro; 5) ineffective monetisation; 6) ADR delisting.

Valuation

Maintain BUY but cut our P/E based TP to US$13.0/ HK$51.0, derived from 19.0x blended 2024E adj. PER (down from 23.0x previously) by assuming 75% profit contribution from music (23.0x adj. PER on latest global music comp, down from 30.0x previously) and 25% from social (unchanged 5.0x adj. PER) and unchanged US$0.68 2024E adj. EPADS.